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Part I

Caution: This may cause drowsiness, may lead to anxiety. Caveat: Because this material is very topical, I may have to change or alter slide. Slides subject to change. Part I.

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Part I

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  1. Caution: This may cause drowsiness, may lead to anxiety. Caveat: Because this material is very topical, I may have to change or alter slide. Slides subject to change

  2. Part I • George Bush declared, "I've abandoned free-market principles to save the free-market system to make sure the economy doesn't collapse"? He might as well of said, "Hide your money, kids — 'cause I'm coming to take it!"

  3. "The private sector got us into this mess. The government has to get us out of it," Barney Frank September 20 2008

  4. Anywhere there is a problem in the economy, you will find the market has been meddled with. • Health Care • Global Warming • Housing market and financial crisis

  5. Financial Booms and Busts: Throughout History Government Intervention Bust Boom Corruption Federal Reserve Policies

  6. Part 1: Government Intervention

  7. Affordable Housing • From 1930s on Government has pushed home ownership -- specifically special affordable loans. This became acute in the early 2000s. • Looser Standards • participation in a credit-counseling program NINJA loans

  8. Securitization • A borrower gets a loan from a lender. • The lender bundles a number of home loans and sells bundle to an investment bank • 3. The investment bank issues bonds secured by the mortgages.

  9. Securitization • 4. Bonds/Loans are classified into “tranches” or risk groups. S&P, Moodys and Fitch then indicate the risk. Medium risk Low risk High risk

  10. Securitization • 5. Bonds are sold to bigger investors • 6. Potential risk of default is solved by credit default swap

  11. Part 2: Fed Policies

  12. The Bubble • Federal funds rate was kept at 2 percent or lower from November 2001 right through to the end of 2004. • Greenspan In 2002 called mortgage markets a "powerful stabilizing force" because they allowed people to extract equity from their homes. • In 2004 said that homeowners should consider using adjustable-rate mortgages to save on interest and prepayment costs.

  13. US Housing Bubble

  14. Is it due to lax regulation? Were regulators sleeping? • NO regulators relaxed lending standards - at the behest of community groups and "progressive" political forces.

  15. FF with implicit govt guarantee can offer product at lower prices: gap between AAA and 10 yr Treasury 1.46% whereas between FF and 10 yr Treasury .5%

  16. The Bubble Pops

  17. Part 3: Corruption

  18. Barney Frank (in the House) and Chris Dodd (in Senate) pressured FF to ensure their constituents received affordable housing

  19. Government Controlled Rating Agencies AAA Medium risk Low risk High risk

  20. Much of the Bad Debt had been securitized THE BUBBLE IS POPPED: In 2005 Fed Funds rate increased tremendously– from less than 2% to more than 5%

  21. It is not the free market that is a problem • Can’t hide the fact that the government is the pig at the trough. • No lending because don’t know what is in the AAA rated securities

  22. Solutions? • Allow firms to go bankrupt – perhaps need to speed up bankruptcy process • Purchase bad assets • Recapitalize – buy equity positions Bailouts

  23. Fed and Govt say TOO BIG TO FAIL BAILOUTS

  24. Part 2The Car Wreck

  25. Govt Runs Deficit $2 TRILLION

  26. Insanity: doing the same thing over again and again and expecting a different result Japan: spend on infrastructure

  27. Japan

  28. How do we pay for it? Either Taxes or Debt. • Without health care spending or global warming spending, U.S. debt will more than double from about 40% of GDP to over 80% by 2019. • Debt is paid for by printing money now or raising taxes in the future.

  29. Money Supply Increases

  30. From the first quarter of 2008 to the first quarter of 2009, the monetary base increased at an annual rate of 753%.

  31. Presenting, the all new Trillion Dollar Bill…

  32. What Should Be The Solution? Privatize

  33. Privatize means Govt has to Cut Spending, cut Taxes on Individuals and Businesses --AND sell assets

  34. Instead we Nationalize

  35. Income Tax Tipping Point

  36. Historical Level of Deficits: -2.5%

  37. Income Tax Rates Not Economically Feasible Source: Congressional Budget Office

  38. Part 3The Great Depression Redux

  39. Are we Headed for a GREAT Depression?Then vs. Now • Bubble: too much liquidity – 1922-29-- ending in a crash– • same as 2002-2006 • Government won’t let markets adjust: demands that wages and prices remain high, forms cartels, AAA, etc., supports unions – • same as Obama bailouts • Smoot Hawley Tariff – • similar to “buy American” the Trade Reform, Accountability, Development and Employment (TRADE) Act (H.R. 3012); The Cap and Trade Bill • Unemployment rises to 25% and continues up – • unemployment over 10%

  40. Price Index for Commercial Real Estate

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